Australia's online watchdog on Wednesday dropped a legal effort to force Elon Musk's X to remove posts depicting the violent stabbing of a Sydney priest.

"I have decided to discontinue the proceedings in the Federal Court against X Corp," eSafety Commissioner Julie Inman Grant said in a statement.

The watchdog had ordered Musk's company to globally remove about 65 video and audio clips of the April 15 non-fatal attack in a church.

But X challenged the commission's right to make a global takedown order, arguing that geoblocking users in Australia was enough.

The watchdog had argued X's measures were easily dodged with the use of popular location-masking services like VPN.

Inman Grant -- a former Twitter employee -- defended the decision to take legal action: "I stand by my investigators and the decisions eSafety made."

"Our sole goal and focus in issuing our removal notice was to prevent this extremely violent footage from going viral, potentially inciting further violence and inflicting more harm on the Australian community," she said.

The disputed posts showed Assyrian orthodox Bishop Mar Mari Emmanuel being stabbed about six times during a live-streamed sermon.

Video of the attack, which spread widely on social media and sparked a riot by followers of the church in western Sydney, has been blamed by Australian authorities for feeding tensions in the community.

A 16-year-old has been charged with "committing a terrorist act" in relation to the attack, which is said to have been religiously motivated.

The eSafety Commissioner said most Australians accepted that such graphic material should not be broadcast on television.

This "begs an obvious question of why it should be allowed to be distributed freely and accessible online 24/7 to anyone, including children," she said.

Inman Grant said X routinely took down content globally, citing its removal of a compilation video of a knifeman's rampage in a Sydney shopping mall in April.

Other major platforms had complied with the watchdog's requests and removal notices related to the church attack, she said, including Meta, Microsoft, Google, Snap, TikTok, Reddit and Telegram.

"This is because the video violated their terms of service and their standards of decency."

Inman Grant said she now "welcomed the opportunity" for a merits-based review of her decision by the country's Administrative Appeals Tribunal.

Her decision to drop the case followed a setback last month when the Federal Court refused to extend the order for a global ban while the court case was being fought. (AFP)